Bitcoin, the original cryptocurrency, has been on a wild ride since its launch. created in 2009. Earlier this year, the price of a Bitcoin jumped to more than $60,000, an eight-fold increase in 12 months. Then, within a few weeks, that value dropped to half that value. Values of other cryptocurrencies such as Dogecoin have increased and decreased even more sharply, often on the sole basis Elon Musk's tweets. Even after the recent drop in their prices, the total market value of all cryptocurrencies now exceeds $1.5 trillion, a staggering amount for virtual objects that are nothing more than computer code.
Are cryptocurrencies the wave of the future and should you use and invest in them? And the massive fluctuations in their prices – almost 1,000 billion dollars have been erased from their total value in May, does it portend trouble for the financial system?
Bitcoin was created (by a person or group who remains unidentified to this day) as a way to transact without the intervention of a trusted third party, such as a central bank or financial institution. Its emergence in the midst of the global financial crisis, which has shaken confidence in banks and even governments, is timely. Bitcoin enabled transactions using only digital identities, providing users with a degree of anonymity. This has made Bitcoin the currency of choice for illicit activities, including recent ransomware attacks. He powered the dark darknet illegal online commerce, like PayPal, contributed to the rise of eBay by facilitating payments.
While Bitcoin's seesawing price may attract attention, the monetary and financial revolution it has sparked is far more consequential and will ultimately affect all of us, for better or for worse. .
As it has grown in popularity, Bitcoin has become cumbersome, slow, and expensive to use. It takes about 10 minutes to validate most transactions using cryptocurrency and transaction fees has been at a median of around $20 this year. Bitcoin's unstable value has also made it an unviable medium of exchange. It's like your $10 bill could buy you a beer one day and a bottle of fine wine another.
Additionally, it has become clear that Bitcoin does not offer true anonymity. The government's success in track and recover part of the Bitcoin ransom paid to hacking collective DarkSide as part of the Colonial Pipeline ransomware attack has increased doubts about the security and untraceability of Bitcoin transactions.
Although Bitcoin has failed to achieve its stated goals, it has become a speculative investment. It's confusing. It has no intrinsic value and is not supported by anything. Bitcoin fans will tell you that, like gold, its value comes from its scarcity: Bitcoin's computer algorithm imposes a fixed cap of 21 million digital coins (nearly 19 million have been created so far). But scarcity in itself can hardly be a source of value. Bitcoin investors seem to be relying on the stupidest theory: All you need to profit from an investment is to find someone willing to buy the asset at an even higher price.
Despite their high valuations on paper, a collapse of Bitcoin and other cryptocurrencies is unlikely to shake the financial system. Banks have mostly stayed away. As with any speculative bubble, naive investors who arrive late to the party face the greatest risk of losses. The government should certainly warn retail investors that, just as in the case of The GameStop saga, they act at their own risk. Securities that allow speculation on Bitcoin prices are already regulatedbut there is little more the government can or should do.
Bitcoin is not trivial. Transactions are processed by “miners” who use enormous amounts of computing power in exchange for rewards in the form of Bitcoin. According to some estimates, the Bitcoin network consumes as much energy as entire countries like Argentina and Norway, not to mention the mountains of electronic waste from specialized machines used for such mining operations which burn quickly.
Whatever the final fate of Bitcoin, blockchain technology is really ingenious and revolutionary. Bitcoin has shown how programs running on networks of computers can be leveraged to make payments securely, within and between countries, without relying on greedy financial institutions that charge high fees. For migrant workers sending money home, for example, these fees pose a major burden. Technologies that make payments cheaper, faster and easier to track would benefit consumers and businesses, facilitating domestic and international trade.
Technology is not without risks. Facebook is considering issuing its own cryptocurrency called Diem intended to facilitate digital payments. Unlike Bitcoin, Diem would be fully backed by reserves of US dollars or other major currencies, ensuring a stable value. But, as with its other ostensibly noble initiatives, Facebook can hardly be trusted to put the public's well-being ahead of its own. The prospect of multinational corporations one day issuing their own unsecured cryptocurrencies around the world is deeply worrying. Such currencies will not threaten the US dollar, but could wipe out the currencies of smaller, less developed countries.
Variants of Bitcoin technology also make many financial products and services accessible to the general public at low cost, directly connecting savers and borrowers. These developments and the possibilities created by new technologies have prompted central banks to consider issuing digital versions of their own currencies. China, JapanAnd Sweden are already conducting trials of their digital currencies.
Ironically, rather than truly democratizing finance, some of these innovations risk exacerbating inequalities. Inequality in financial knowledge and digital access could lead savvy investors to profit while the less well-off, dazzled by new technologies, assume risks they do not fully understand. Computer algorithms could worsen deeply ingrained racial and other biases in credit scoring and financial decisions, rather than reducing them. The ubiquity of digital payments could also destroy any vestige of privacy in our daily lives.
Although Bitcoin's seesawing price gets most of the attention, the consequences are far more serious. revolution in money and finance it started a phenomenon that will eventually affect all of us, for better and for worse.